A firm currently offers terms of sale of 5/10, net 50. Calculate the effective annual rate. (Use 365 days in a year.
To calculate the effective annual rate (EAR) for the given terms of sale, we need to consider the discount offered and the credit period provided.
In this case, the terms are stated as "5/10, net 50", which means that the buyer can take a 5% discount if they pay within 10 days; otherwise, the full amount is due within 50 days.
To calculate the EAR, we'll use the following formula:
EAR = (1 + (Discount / (1 - Discount))^(365 / Credit Period) - 1)
First, let's calculate the discount rate:
Discount = 5% = 0.05
Next, we'll find the credit period:
Credit Period = 50 days
Finally, we'll substitute these values into the formula to calculate the EAR:
EAR = (1 + (0.05 / (1 - 0.05))^(365 / 50) - 1)
Calculating the formula yields the effective annual rate.